Stock markets aren’t ignoring Iran. is increasing for these three very real reasons

The war between the US and Iran continues with no sign of a peace agreement. Someone needs to tell the stock market.

After a small initial decline near the start of the war, the S&P 500 index rebounded to an all-time high and closed above 7,400 for the first time ever on Monday, even though oil prices remain high.

Some say the stock market is fueled by speculative activity and ignores the impact of the coming war. But that’s not all.

There are very real fundamental reasons for the resurgence, including an economy that is much less dependent on oil to power it, companies with higher profit margins even though energy costs are a small input, and high-tech companies whose businesses are insulated from the effects that will drive S&P 500 earnings in the future.

The index made a quick recovery from its March lows, rebounding about 17% from about 6,300 in just over a month.

When the U.S. first attacked Tehran on February 28, the S&P 500 index only fell about 8% from high to low. In other words, we are not even experiencing an adjustment (defined as a decline of more than 10% but less than 20%) associated with an energy shock that theoretically would spread to the global economy.

Since the conflict began, oil prices exceeded $120 per barrel at the height of the conflict and lastly exceeded $100. Gasoline prices have soared to more than $4.50 per gallon at the pump, and more than $5 in many states.

Many investors argue that market resilience is a matter of duration, implying hopes that companies can weather the supply chain disruptions caused by the closure of the Strait of Hormuz, as long as they are temporary and not too severe.

But with stocks rising even as the U.S.-Iranian conflict enters its third month, it’s time to consider a more constructive explanation.

Here are some of them:

Low influence on companies

Even if the Strait of Hormuz reopens tomorrow, the damage has already been done. Experts in the field expect it will take several weeks for ships leaving the oil route to reach destinations in North America, Europe and East Asia. And even after that, high oil prices are not expected to return to pre-crisis levels. That means businesses and consumers around the world will be dealing with greater price pressure for some time.

However, when it comes to the U.S. market, many companies will be largely unaffected by this change, at least based on their latest earnings reports. Trivariate Research examined 1,465 earnings records since the beginning of March and found that only 10% of the total market capitalization of the U.S. stock market expects a negative or combined impact from the U.S.-Iranian war. The company stated that this 10% approximation is, if anything, an overestimate.

For investors, this means the S&P 500 could continue to perform well even if parts of the market decline. Trivariate Research is particularly wary of the consumer discretionary sector, where a number of companies have already come forward to discuss the impact of the war on consumers. The company says other names to avoid include companies that have recorded multiple contractions year-to-date, such as certain software companies.

huge technology profits

The latest earnings season also highlighted the importance of another pillar of the bull market: artificial intelligence.

In fact, the largest companies in the S&P 500 are the best companies of all time from a revenue perspective. The top 10 S&P 500 companies now account for about 34% of the index’s total returns, double the 17% in 1996, said Thorsten Slok, Apollo’s chief economist. JPMorgan’s trading desk noted last week that the Magnificent Seven companies’ earnings outperformed the other 493 stocks in the S&P 500 index by more than 40%, reaching levels not seen since. 2014.

Indeed, that large concentration worries investors who are conscious of the risk of relying on just a handful of names. But the rapid expansion of AI use cases and the swell of capital spending, along with accelerating earnings in the tech giants’ first-quarter earnings season, are convincing investors that market concentration is a feature, not a bug, and that AI’s fundamental story remains intact.

oil independence

There is also the fact that the US economy is less dependent on oil than during past crises. Antonio Gabriel, global economist at Bank of America Securities, said in a note last month that the U.S. needs only about a third of the oil it did in the 1970s to produce the same amount of GDP.

Even if the Iran war escalated, a 10% oil price shock would affect inflation by only a quarter of a percentage point today, compared to 0.90 percentage point in the 1970s, Gabriel said.

“A repeat of the 1970s seems an unlikely scenario,” Gabriel wrote.